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Judge sets procedure to separate Puerto Rico sales tax revenue among creditors

By on July 17, 2018

SAN JUAN – In what appears to be a sign that negotiations to settle the dispute between creditors who hold Puerto Rico general obligation (GO) bonds and Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders is moving forward, Judge Laura Taylor Swain has established procedures to manage 5.5% of the island’s sales and use tax revenue.

The order requires the Bank of New York Mellon, the custodian of the sales and use tax, to separately account for “Pre-July 1, 2018 Funds, the Abeyance Period Funds, and the Post-Abeyance Period Funds” to ensure the three pools and “proceeds from investment of such funds, are clearly identifiable.”

Agents representing commonwealth and Cofina creditors have been trying for months to settle the dispute over the sales tax revenue, which the general obligation bondholders want.

Judge Swain said pre-July 1 funds will continue to be held in the debt-service accounts where they are deposited and any income and interest obtained.

The Abeyance Period Funds will be put in a “Revenue Account,” which the trustee bank must create subaccounts for by July 27, with each debt-service account established for senior bonds and first subordinate bonds, which “shall be referred to as the ‘Abeyance Period Revenue Subaccount’ and the ‘Abeyance Period Debt Service Subaccounts.’”

All abeyance period funds received by the bank and any income and interest earned and gains realized in excess of losses suffered on account of such funds will be deposited into the Abeyance Period Revenue Subaccount.

Similarly, before the end of the abeyance period, the bank must create subaccounts of the revenue account and each debt-service account established for senior bonds and the first subordinate bonds that will be referred to as the “Post-Abeyance Period Revenue Subaccount” and the “Post Abeyance Period Debt Service Accounts.”

The bank must use “reasonable efforts” to invest funds held in the subaccounts “consistent with past practice….”

The judge said the funds will continue to remain subject to court orders.

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